Total Compensation Trends in Nonprofits: Interview (Part 2) with Paul Gavejian of Total Compensation Solutions

In a post earlier this week, we spoke with Paul Gavejian of Total Compensation Solutions (TCS) about some interesting trends in formal bonus/incentive compensation plans among nonprofits that were revealed in the firm's most recent edition of its annual Not-For-Profit Survey.  Today, in Part 2 of our interview with TCS, we take a look at overall total compensation trends among non-profits; specifically some shifting in different elements - particularly benefits - of the total compensation package provided by these organizations.

Q: The press release for the most recent edition of your Not-For-Profit Survey notes a movement toward more moderate benefit packages for nonprofits, a sector that has traditionally been known for providing generous benefits (often to compensate for less-than-generous cash compensation). Is this change in the benefits packages primarily in the area of health benefits – or are other benefit elements being impacted as well?

A: We observe that there is moderation in the benefits package in two areas. First, in reaction to significant increases in the cost of medical premiums, non-profits appear to be asking their employees to share the premium rather than absorb the full cost of double-digit premium increases. We observe that the costs of these specific benefits reported by participants are down. In a market where health costs are increasing at double-digit levels, we believe that employees are being asked to contribute 5% to 10% more of the overall cost of these benefits than in the past. The second area of moderation is in retirement pension benefits where there is a reduction in the number of organizations that offer a match to the 401(k) or 403(b) plans that these organizations sponsor. Here we observe a marginal reduction in both the number of organizations offering defined contribution and defined benefit plans as well as the actual percent of match on employee contributions.

Q: Is this trend, from what you have noted, primarily a response to cost increases, or are there other factors at play?

A: These trends are definitely in response to costs. With finite operating budgets or budgets that are growing marginally, these organizations have to cut back on something. The biggest line item cost is employee pay and benefits and it’s the one area where they can cut back and show significant cost savings.

Q: As this shift is happening, do you note (through your survey) an offsetting increase in the competitiveness of not-for-profit salaries – or other areas of total compensation?

A: Non-profits need to maintain their competitiveness so they have to find ways to cut back on their costs. They have more control over salaries and bonuses and can adjust these to meet their limited budget. The area where they exercise less control is in benefits, which third parties tend to control (insurance companies raising the cost of health care premiums). While it may be drastic, a change in the cost sharing arrangement or an increase in deductibles or co-pays is an effective way to deal with these increasing health care costs. And, by the way, this is the way that for-profits are dealing with the increasing costs as well.

Q: How will this shift, in your mind, impact the ability of nonprofits to compete in the marketplace for talent?

A: The ability of non-profits to effectively compete will depend on several factors. While pay will remain relatively low compared to the for-profit sector, benefits can be an effective means of reducing costs and that’s what they need to do. We suspect that non-profits will continue to push their mission objectives and attract employees using this factor. It’s an effective means of drawing new staff members that want to be involved in a good cause.  In summary: The bottom line for nonprofit organizations is that they need to ‘take it up a notch’ in their competition with for-profit companies. They need to recruit talented staff from recent college graduates and from other non-profits and the best way to do this without breaking the bank is to offer a truly competitive cash compensation package and more realistic benefits.

Total Compensation Solutions (TCS) is a human resources consulting firm dedicated to assisting clients in achieving their strategic compensation objectives. The firm uses market data to identify best practices in a variety of topical areas including: compensation; performance management; organization structure; health and welfare; and retirement benefits.

More on Paying Fundraisers Based on Contributions (or not)

Kris Dunn, author of The HR Capitalist, one of my favorite blogs, has a great reaction to my recent post on fundraisers being prohibited from pay based on contributions.  Read his post (What? Non-Profit Rainmakers Can't Be Paid for Making it Rain??) and join in the blog-o-debate!

Fundraising Professionals Prohibited from Receiving Pay Based on Contributions

I continue to bump into people who design - or oversee the design of - compensation plans in non-profits and who are not aware of this potential issue, so I thought the topic worth a post.

The Association of Fundraising Professionals, as part of its Code of Ethical Principles and Standards, specifically prohibits its members from accepting compensation that is based directly on fundraising contributions.

Specifically, the code states:

(21) Members shall not accept compensation or enter into a contract that is based on a percentage of contributions...

This does not mean that incentives - or performance-based compensation - is off the table for fundraising and development positions.  As the code states:

(22) Members may accept performance-based compensation, such as bonuses, provided such bonuses are in accord with prevailing practices within the member's own organization and are not based on a percentage of contributions.

And yet contribution-based incentive plans, many of them astonishingly commission-like in their structure, continue to proliferate in fundraising and related fields.  Even in the face of Intermediate Sanctions regulations (IRS 4958) which prohibits any revenue-sharing arrangements as cases of private inurement.

In my work with non-profits, and particularly in the development and fundraising areas, I encourage a focus on "lead" measures when designing incentive and other pay-for-performance programs.  Lead measures, as I've posted before, focus on achievements that are predictive of success; in this case, success in securing contributions.  Lead measures could reflect the attainment of key elements of a fundraising strategy - which might range from communication to event management to internal process improvement - and which should lead ultimately to fundraising success.  Conversely, the contributions themselves are a "lag" measure, reflecting success that has already taken place (similar to traditional for-profit accounting measures like revenues and net income).

Even the for-profit world is placing increasing emphasis on "balanced" and forward-thinking metrics; lead as well as lag measures.  For non-profits, however, the notion of balance in measures is critical, particularly as we begin tying them to compensation.

And, as one of my favorite quotes goes, someone once said that running an organization solely on the basis of lag measures is like steering a boat by looking at its wake.   

Bonuses to Top Nonprofit Executives Rise Significantly

The amount of money that the nation's largest nonprofit organizations paid in bonuses to their top executives more than doubled from 2005 to 2006, according to a recently released Chronicle of Philanthropy survey of executive compensation in 298 charities and foundations.

According to the Chronicle, average bonus payments to top executives grew from $69,477 in 2005 to $142,700 in 2006.

This finding is aligned with what seems to be a growing interest among nonprofit organizations and their boards in tying executive compensation to organizational performance.  To this, I would submit my observation that the nonprofit sector is not yet as experienced as the for-profit sector in developing and managing incentive pay.  The design of incentive plans in nonprofit organizations must reflect considerations not present in the for-profit sector, including - but not limited to - the nature of the organization's tax-exempt mission and the increasing scrutiny of regulatory and other bodies (such as the IRS and Attorneys General) on these compensation arrangements.  One case in point noted by the Chronicle is the Association of Fundraising Professionals which - as part of its professional code of ethics - prohibits members from tying their compensation directly to fundraising performance.  Fundraising executives and professionals, who are also part of the increasing trend toward incentive pay, must develop and use plans that consider and focus on broader, mission-related considerations in order to comply.

Related Posts:

Chronicle of Philanthropy to Hold Online Discussion of Executive Compensation

On Executive Incentives in Nonprofits

Incentive Compensation in Nonprofits

Chronicle of Philanthropy to Hold Online Discussion on Nonprofit Executive Compensation

The Chronicle of Philanthropy will hold on online discussion about executive pay in the nonprofit field on Wednesday, September 26, 12 noon Eastern time.  The discussion, which is open to everyone (not just Chronicle subscribers), will feature as guests Lyn Brennan, an executive recruiter at Battalia Winston International, and Stephanie Geller, a researcher at Center for Civil Society Studies at Johns Hopkins University, and will also cover some "intriguing findings" from the Chronicle's recently released survey of nonprofit executive compensation.

Related Posts:

Bonuses to Top Nonprofit Executives Rise Significantly

Work Environment Drives Employee Engagement

In a comment to my previous post on Work Environment as a Reward Element, which looks at the powerful role that both the physical and psychic aspects of work environment play in attracting and retaining employees, Frank Giancola shared an interesting piece of research from a Towers Perrin study a few years ago.

The TP study Working Today: Understanding What Drives Employee Engagement examines the level of engagement in the workforce, and also looks at the elements of work that most strongly drive employee engagement.

Interesting finding #1:  Employee engagement is higher in nonprofits than in any other industry segment.

Look at the following data, which highlights the % of employees surveyed who score as "highly engaged" (high scores across all engagement factors surveyed) by industry sector -

• High technology - 15%
• Insurance - 18%
• Pharmaceuticals - 16%
• Heavy manufacturing - 14%
• Hospital - 15%
• Finance/banking - 17%
• Nonprofit - 42%
• All industry composite - 17%

Interesting finding #2:  Employee engagement is driven by work environment, not pay and benefits. 

Now take a look at what the TP study found to be the top ten drivers of employee engagement.  Notice that neither pay nor benefits shows up in this list, which syncs up with what we know to be mostly true:  that the nonprofit sector is not "buying" high levels of engagement through generous compensation offerings. 

1. Senior management interest in employees
2. Challenging work
3. Decision-making authority
4. Customer orientation
5. Career advancement opportunities
6. Reputation of the company
7. Collaboration with coworkers
8. Resources to get the job done
9. Input on decision making
10. Senior management vision

Most of these engagement drivers can be classified as aspects of the work environment - reinforcing the point that this "qualitative" aspect of employment at your organization is just as important as the more "quantitative" (i.e., pay and benefits) elements, and that your total reward philosophy must take into account the entire picture.

And for nonprofits in particular:  don't overlook the opportunity you have to capitalize on your work environment to attract, retain and engage employees.

Incentive Award Trends for Non-Management Positions

I did some analysis on trends in incentive prevalence and average award size for non-management jobs, and thought I'd share some highlights here.  Sources for this information include newly released surveys from Watson Wyatt Data Services and others, representing thousands of organizations and hundreds of thousands of employees nationally.  I have also separated the data by profit sector, to look at not-for-profit practices versus those of for-profit organizations.  (The careful observer will note that the dominance of for-profit practices in the "all" data, probably due to sample sizes.)

Note also that the prevalence statistics here reflect employees who received an incentive award, not those who were eligible to receive one (presumable a larger number, as not every incentive plan pays out each year or for each employee).

Production/Technical/Trades Positions

• Percent receiving an incentive award
  • For-profit organizations:  32%
  • Not-for-profit organizations:  11%
  • All organizations:  28%
• Average incentive award paid (as % of base salary)
  • For-profit organizations:  4.4%
  • Not-for-profit organizations:  3.5%
  • All organizations:  4.3%

Office/Administrative Support Positions

• Percent receiving an incentive award
  • For-profit organizations:  39%
  • Not-for-profit organizations:  13%
  • All organizations:  35%
• Average incentive award paid (as % of base salary)
  • For-profit organizations:  5.6%
  • Not-for-profit organizations:  4.3%
  • All organizations:  5.5%

Professional Positions

• Percent receiving an incentive award
  • For-profit organizations:  41%
  • Not-for-profit organizations:  15%
  • All organizations:  37%
• Average incentive award paid (as % of base salary)
  • For-profit organizations:  7.5%
  • Not-for-profit organizations:  5.7%
  • All organizations:  7.4%

Free Compensation Planning Survey for Midwest Nonprofits

Altura Consulting Group conducts an annual compensation planning survey for nonprofit organizations in the Midwest - as in the past, all participating organizations will receive a complimentary copy of the report of survey results!

Survey content includes:

• Actual 2007 and projected 2008 salary increases
• Actual 2007 and projected 2008 salary range structure adjustments
• Prevalence of bonus/incentive opportunities and most recent average awards for different employee groups

If you are a nonprofit organization located in the states of Minnesota, North Dakota, South Dakota, Montana, Iowa, Wisconsin and/or Nebraska, you can learn more and participate by downloading the brief survey participation questionnaire below.

Download 2007_nonprofit_sal_plng_survey_questionnaire.doc

The survey participation deadline is August 3, 2007.  The survey report will be issued in September, 2007.

Driving Performance and Accountability Key to Pursuing a Tax-Exempt Mission

As someone who has the opportunity to work with a number of nonprofits, I am a fan of the GiveWell blog, particularly its focus on performance management, and wanted to call attention to a recent post on the necessity of honest feedbacks for and in nonprofit organizations.

While a number of the nonprofits I've worked with are skilled at performance management, others struggle with the concept that dispensing candid performance feedback and direction to employees is somehow at odds with their charitable mission.

Holden makes the central point that a climate of unfiltered feedback and a willingness to accept and learn from criticism is key to advancing the mission.  His open letter to nonprofit employees is rather harsh and blunt in parts, but his points are important to consider (and he is willing to turn the mirror of truth back on himself and his initiative as well).  In the letter, he asks and then addresses the question of why people choose to work for a nonprofit organization:

I hope the answer is that you care more about making the world a better place more than just about anything else.  If that's right, then consider how helpful criticism - all criticism, regardless of tone - can be to your mission.  Unfiltered criticism is the best way to get others' perspectives on what you're doing, which unless you're already omniscient is hugely valuable information.  If you get offended by criticism to the point where you fail to learn from it - or worse, get demoralized - this is hurting the people you're trying to help.  So don't

Working out can be painful and unpleasant (granted, I'm largely speculating here), but any aspiring athlete who skipped it would be a joke.  The mental equivalent is learning from criticism, and if you're putting yourself forward as a person who can use others' money to improve the world, you'd better be ready to put learning and improving first, and your feelings second (or twelfth).  So here's my advice to you:  seek out as much feedback as you can, push people to be honest, and get so used to negative feedback that its emotional impact wears off (leaving only the educational impact)...

If you find yourself unable to do this, I have only one explanation: that helping people isn't the core of your motivation.  That you care more about your short-term emotions, day to day, than about the good work you're trying to do.   That you've chosen nonprofit over for-profit not because you want to improve the world, but because it's a nice, cuddly atmosphere where you will never be challenged.

I don't endorse the idea that criticism is always best delivered raw and unfiltered; I think delivering negative (and positive) feedback is a skill worth investing in (as part of a broader performance management effort) - yet, it is also important to remember that a willingness to call out and discuss performance issues is a necessary first step to improvement.

A tough message perhaps, but one that gets to the important point of why driving performance and accountability through feedback (which includes constructive criticism as well as positive reinforcement) is absolutely key to pursuing a tax-exempt mission.

Performance Accountability a Must at Nonprofits

A terrific post Dear Executive Director, Please Fire Your Staff on the GiveWell blog begins with this inarguable truth: "It is important that everyone involved in a nonprofit's mission be accountable."  The author further states, based on his experience, regarding the most striking difference between the nonprofit organizations and the for-profit sector, that "nonprofits are much worse at doing internal evaluation of personnel, and most of the time it barely happens at all."

Why should this be true?

While there are many exceptions to every rule -- I do know nonprofits that are working hard to effectively manage employee performance and I also know of for-profit businesses that do a crappy job of this -- I believe there is also a kernel of truth here.  Performance management, which has at its heart the act of holding people accountable for producing good work results, is something with which many nonprofits struggle.  Some feel the process runs at odds with their mission, culture and values, while others balk at the necessity of having to act "like a business".  Many nonprofits understand the importance of performance management at the Board and leadership level, but encounter difficulty in implementing and sustaining these practices throughout the organization. 

The simple truth is that nonprofits must be accountable for using their resources well and wisely.  They owe it to the clients they serve, and they owe it to their funders (whether they be the public at large or private donors) to do so.  And this means proactively and assertively managing the performance of what is likely their largest and most costly asset:  their employees.